23 September 2011

MISC poised to weather the storm:

KUALA
LUMPUR: MISC Bhd seems to be back in choppy waters again amidst the capacity
glut in the shipping sector that has weighed down on freight rates.

Its chairman Datuk George Ratilal
said the industry outlook would remain negative in the next two years and
shipping rates would stay down. The recovery would only happen in two years, he
added.

Ratilal said the challenging
environment would hit MISC’s earnings badly. The sharp drop in the group’s
first quarter (1Q) results could be an indicator on MISC’s earnings prospects going
forward.

MISC’s net profit plunged 59% to RM187.8
million for 1Q ended June 30, from RM461 million in the previous corresponding
quarter.

The fall in profit was mainly due
to losses in petroleum business from the low freight rates and higher losses in
liner business from lower liftings. But, Ratilal was quick to emphasise that
MISC is not solely a shipping group.

MISC president and CEO Datuk
Nasarudin Md Idris said MISC would be able to weather the storm its other
divisions, such as liquefied natural gas (LNG) tankers keeping it buoyant.

“Our LNG shipping has 29 vessels
with long-term charter agreements with Petronas (Petroliam Nasional Bhd) at
steady rates. Heavy engineering and marine services is not as stable but with
good E&P (exploration and production) and good visibility,” Nasarudin said.

Its 66.5%-owned unit Malaysia
Marine and Heavy Engineering Bhd, which was listed in October 2010, has an
order book of RM3.1 billion that will last until 2013.

The group’s president of corporate
planning and development Yee Yang Chien said the shipping rates would not
possibly get worse from the current level.

Shipping rate were as high as US$200,000
(RM630,000) per day at their peak in early 2008, but are barely about US$1,000
a day currently. According to Yee, ship operators are running at a loss
operating at the rate of US$1,000 per day. “Operating costs, hiring crew and
fuel alone will cost more than US$8,000. Most owners prefer to lay by their
ships rather than lose money running them,” he added.

The vessel supply imbalance
softened slightly in 2010 due to record levels of scrapping as many of the
older vessels reached the end of their life but scrapping in 2011 has fallen, said
Yee.

MISC owns 50 petroleum tankers that
make up almost 40% of its entire fleet and the group expects 11 newbuildings to
be delivered by next year, plus 3 units the following year. The newbuildings
are mainly petroleum tankers.

Despite the current economic uncertainties,
Nasarudin said the group would not defer deliveries of its vessels.

Ratilal said the downgrade did not
come as a surprise but noted that MISC had strong support from its major
shareholder Petronas. “We’re in a much better position compared to other
players,” he said, referring to the profitable LNG shipping arm of MISC.

MISC has allocated RM4 billion to
RM5 billion for capital expenditure (capex) over the next 2 to 3 years.

Ratilal indicated that given the
bleak industry outlook and the current relatively high asset prices, acquisition
of distressed assets was unlikely at this point in time.

“Ship owners have thus far proven
that they have holding power but cracks have already begun to show and if
conditions persist, opportunities may arise and we will explore them,” said
Ratilal, citing MISC’s acquisition of American Eagle Tankers Ltd from Singapore’s
Neptune Orient Lines in 2003.

Asked if MISC would sell off
underperforming assets, Ratilal said if conditions persist the group wouldtake a hard look at its portfolio. “Getting
out of a business is a major decision. It is very hard to get back in and
rebuild later.”

Ratilal said: “We will not shy away
from taking hard decisions that protect the value of the company.

“What we will try to do is to
manage loss without sacrificing safety or reliability.”